The Yen Is Clobbering The Recovery

Government officials are voicing greater concerns about Japan's recovery, and the reason is the yen. On May 25, Bank of Japan governor Yasuo Matsushita warned a banking group that "the recent additional rise of the yen might stall improvement in corporate profits and business sentiment."

Clearly, the yen-induced weakness in exports is slamming profits and output, causing record unemployment. The Ministry of International Trade & Industry said industrial output fell 0.2% in April. The decline was a surprise, and MITI's survey of manufacturers has projected that output will fall an additional 0.8% in May and 2% in June (chart).

Consumers are also struggling this quarter. Sales at department stores and supermarkets in April were down 1.7% from a year ago, after total household spending fell 0.6% in the year ended in March, the sixth drop in a row. Employment worries are fueling the cutbacks. The jobless rate hit a record 3.2% in April, with only 65 job offers for each 100 applicants.

Household budgets are getting some relief, however, from Japan's spreading deflation. Consumer prices in Tokyo dipped slightly in May, compared with a year ago. That was the third straight decline. Moreover, prices excluding food fell 0.1%, the first drop on record. Price data in Tokyo typically lead trends in the rest of the country. In April, prices nationwide fell 0.2% from a year ago.

Falling factory activity and soft consumer demand hint that Japan's economy is declining this quarter. Other worries suggest a sluggish second half: The banking system remains shaky, and fiscal stimulus will be only modest.

In May, the Organization for Economic Cooperation & Development cut its forecast for 1995 growth in Japan to 1.3%, from 2.5% projected in December. The economy expanded just 0.9% in 1994. For now, the Finance Ministry is sticking to its forecast of growth of 2.8% in the year ending next March. But with the yen rising and public remarks growing more anxious, Tokyo may have to scale back its rosy outlook soon.

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